- Federal tax law will recognize LGBT marriages, allowing same-sex couples to reap the full benefits of itemizing deductions and have expanded ability to claim children as dependents.
- Estate planning structures put in place by same-sex couples (wills and trusts) may have to be reconsidered and potentially unwound to maximize on the default protections received through marriage.
- An end to DOMA would raise myriad legal questions about LGBT couples’ ability to seek legal remedy to regain assets they may have been deprived of in some way because of their marriage’s previous lack of legal standing.
- Advisors say LGBT couples should not be waiting on DOMA–they need to be taking proactive steps to protect themselves and their loved ones in advance of any potential legislative changes.
Marriage equality is important on a personal and societal level—but also on a financial one. Today, a host of provisions and special legal standings are conferred upon straight married couples that are withheld from LGBT couples.
In June, the Supreme Court is expected to rule on the legality of the Defense of Marriage Act, which establishes a federal definition of marriage as only between a man and a woman. The Court’s decision on DOMA could mark the end of the struggle for equal financial standing for LGBT people in the U.S.
With that in mind, NerdWallet asked financial advisors: what could the Supreme Court’s ruling mean to the marital finances of LGBT couples?
An end to double tax returns
Since federal law doesn’t recognize same-sex marriage thanks to DOMA, same-sex couples have to prepare a federal return “as if” they were married, for the purposes of preparation for filing a state return in states that recognize their union. “This is extra work that is costly and time consuming,” commented Shawn Koch, a Portland, Ore.-based advisor. If the Supreme Court rules to strike down DOMA and recognize same-sex marriage on a federal level, that would mean an end to these tax complications.
Advisor Frank Paré explained that the same lack of recognition at the federal level means same-sex couples are in many ways limited or penalized when it comes to their filing status, number of dependents, as well as how they treat their itemized deductions. If the partners must both file as single, rather than jointly, only one can often benefit from itemizing deductions, and only in certain circumstances can both LGBT spouses claim the children they are raising together as dependents. “Ideally, if the Supreme Court broadens the federal definition of marriage to include same-sex couples and rules that same-sex marriages are therefore recognized by federal law.” Paré added. “If that were to happen, then I would expect to see same-sex marriages treated in the same manner as heterosexual marriages when it comes to federal taxes.”
Inheriting without tax pain
DOMA-related tax problems aren’t limited to income tax returns. Berkeley, CA.-based advisor David Flowers added that estate tax comes into play as well. “Today, if LGBT married couples own property together, the surviving spouse could be left with a large inheritance tax or be subject to lawsuits from family members challenging will or trust provisions intended to leave assets to the survivor,” Flowers said. “Some of these legal arrangements will need to be unwound [if DOMA is repealed] to take advantage of the default protections you receive through marriage. If irrevocable gifts have been made, however, couples may not be able to do this and will probably end up paying more in estate taxes than they would have otherwise.”
Karl Schwartz, a consultant at Hewins Financial Advisors, said the impact on estate taxes is very significant for wealthier LGBT couples. “Right now if a wealthy LGBT couple is together and spouse A has an estate of $7 million and dies and leaves everything to spouse B, there would be an estate tax amount due because they are not able to take advantage of the marital deduction or portability of the estate tax exemption like heterosexual couples can,” Schwartz said.
San Francisco-based advisor James Dowd said that a potential end to DOMA raises many questions about the abilities of LGBT married couples to regain the assets they might have “lost” due to their marriage’s previous lack of federal legal recognition. “For instance, a gay couple was married in 2010, and in 2012 moved to a state where gay marriage is illegal,” Dowd commented. “One of the spouses died at the beginning of 2013 without a will, and the biological family of the deceased spouse inherited all of the assets. If DOMA is struck down, will the surviving spouse be able to sue, as a surviving spouse, to recover the inheritance? If estate tax was paid because the estate was larger than $5 million, can the surviving spouse recover the estate tax?” He added these hypotheticals would take years to work their way through the courts.
Social Security extended to spouses and children of LGBT marriages
Today, many widows, widowers and orphaned children have seen Social Security benefits from their deceased family members make a huge difference in their lives – in some cases, keeping them out of poverty. But without federal recognition of same-sex marriage, family members with a deceased LGBT spouse or parent are denied that federal assistance.
“In the typical married couple setting if spouse A receives more social security benefits than spouse B and spouse A dies before B, spouse B gets an increase in social security benefits to match what spouse A was receiving,” said Karl Schwartz. “This could also come into account if a couple has been married for many years and spouse A has an earnings history and spouse B does not for whatever reason. When spouse A starts claiming social security, spouse B is able to receive marital benefits, up to 50% of what spouse A is receiving. In both of these situations were heterosexual married couples can take advantage of these benefits, LGBT couples cannot.” Should DOMA be repealed, it’s expected LGBT spouses would become eligible for Social Security spousal benefits.
Awareness of financial issues is key
Hilary Martin, an advisor with the Family Wealth Consulting Group, said her same-sex married clients tend to focus on end-of-life rights, because they’re read the horror stories about long-time partners being ignored by doctors in their partner’s final hours. “For my LGBT clients, their concerns are far more about being legitimized in the eyes of their larger community and having the freedom to enter into a marriage that will be respected,” Martin added. “The financial issues are definitely second tier.”
Frank Paré, who specializes in advising LBGT couples, said he tells clients not to wait on DOMA before they plan for potential estate issues, health concerns, or parenting concerns in the event something were to happen to their spouse. “Bottom line; I’m not a fan of waiting for potential legislative changes that might mitigate potential family tragedies that might occur at any given time,” Paré said. “Therefore, I suggest that all couples seek out financial and legal professionals to assist in helping them plan now irrespective of any potential legislative change (state and federal) that might benefit them in an uncertain future.”
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